statistics, mathematics, management

Why I’d buy and hold Reckitt Benckiser Group plc forever

While the suggestion that certain shares can be held ‘forever’ has a hyperbolic feel, there’s no doubt that there exist a number of UK businesses that investors should feel comfortable owning over the long term.

Thanks to its strong portfolio of brands and ability to generate consistent profits, £55bn cap consumer good company ReckittBenckiser(LSE: RB) would be one of my top picks.

“A better, stronger company”

Today’s interim results revealed “broad-based growth” across the majority of Reckitt’s brands.The company booked a 14% rise in revenue to just over £5bn in the six months to the end of June, although like-for-like revenue fell by 1%. Pre-tax profit came in at £1.02bn — a 46% rise on the £697m generated over the same period in 2016.

The Slough-based firm reported making “significantprogress” on transforming its portfolio, in line with CEO Rakesh Kapoor‘s desire for Reckitt to become “a more focused consumer health and hygiene business”. The acquisition of Mead Johnson Nutrition — completed last month and a full quarter earlier than expected — appears to be integrating well. Going the other way was the sale of Reckitt’s food business to US business McCormick, the proceeds of which will be used to pay down debt.

But it wasn’t all good news. While Reckitt expects a return to form over the remainder of 2017, the targeted 2% like-for-like growth in full-year net revenue was still labeled as “challenging” given “tough market conditions“. Despite stating that it was now a “better, stronger company“, the ongoing impact of recent operational issues (including the recent NotPetya cyber attack, collapse of sales in South Korea and problematic product launches), also continue to weigh on short term sentiment towards the business. The shares were down over 2% in early trading.

Right now, shares in Reckitt trade on 23 times forecast earnings for 2017. That may seem high but it’s pretty standard for companies of this type, such is the perceived security of their earnings. The business continues to generate stacks of cash and consistently high returns on the money it invests. While relatively low compared to the payouts offered by its FTSE 100 peers, Reckitt’s forecast 2.2% yield is also fully covered by profits and subject to regular hikes by its board (including today’s 14% increase to the interim payout).

Despite its current problems, Reckitt remains a quality operator and one I’d have no problem holding indefinitely.

Like Reckitt, Diageo has also been on the acquisition trail of late, snapping up US super-premium tequila brand Casamigos for $1bn. With the latter delivering a compound annual growth rate of 54% over the last two years, it’s not surprising that Diageo wants a chance to introduce the multi-award winning label, part-owned by George Clooney, to an international audience. The acquisition is expected to complete in the second half of 2017 and begin contributing to profits in four years time.

Like Reckitt, Diageo’s shares will never be ‘cheap’ in the traditional sense, trading as they do at 20 times forecast earnings for 2018. Nevertheless, for such a resilient company, I still think the shares are well worth snapping up.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Diageo and Reckitt Benckiser. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One of my duties is to coordinate quality control objectives and activities to resolve production problems, maximize product reliability, and minimize cost. I also love baking on weekends with my kids.